Calif. enacts tax forgiveness on mortgage debt

taxes logo 250If you have suffered a short sale, foreclosure or loan modification, here’s some good news: Most taxpayers can now exclude canceled mortgage debt income up to $500,000. The limit is $250,000 for married/registered domestic partner (RDP) individuals filing separately.

The California law created by SB 401 now brings us into conformity with the federal debt-forgiveness laws and applies to debt forgiveness in 2009 and through 2012.

However, California’s limits of qualifying principal residence indebtedness differ from federal limits.

The Franchise Tax Board estimates that approximately 100,000 people may benefit from mortgage debt relief for tax years 2009-2012.

For more information on other taxes and fees in California, visit taxes.ca.gov.

Prior to the law’s passage, these amounts were taxable to California. If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount often is taxable. These amounts are generally reported on a 1099-C and are provided to both the taxpayer and the government.

Debt forgiveness on other types of debt, such as a second home or business property, does not qualify for exclusion under the new law.

This is a law has a huge impact for short sellers in California. Now the “phantom debt” produced by the loss of value in your home will not be taxed in a short sale!!

All the more reason to release yourself from the financial stress, save your credit and your family’s future with a short sale.

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